Category Pricing with State Dependent Utility

42 Pages Posted: 14 Jan 2006

See all articles by Jean-Pierre Dubé

Jean-Pierre Dubé

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Günter J. Hitsch

University of Chicago - Booth School of Business

Peter E. Rossi

University of California, Los Angeles (UCLA) - Anderson School of Management

Maria Ana Vitorino

INSEAD; University of Minnesota - Carlson School of Management

Date Written: December 2006

Abstract

There is a substantial literature that documents the presence of state dependent utility with packaged goods data. Typically, a form of brand loyalty is detected whereby there is a higher probability of purchasing the same brand as has been purchased in the recent past. The economic significance of the measured loyalty remains an open question. We consider the category pricing problem in the presence of loyalty and demonstrate that a retailer has an incentive to invest in building brand loyalty to maximize the present value of category profits and that this materially affects optimal pricing. Given the well-known problems with the confounding of state dependence and consumer heterogeneity, loyalty must be measured in a model which allows for an unknown and possibly highly non-normal distribution of heterogeneity. We implement a highly flexible model of heterogeneity using multivariate mixtures of normals in a hierarchical choice model. We find important deviations from the standard one component normal mixture.

Keywords: Dynamic pricing, loyalty, state dependence, consumer heterogeneity

JEL Classification: M3, D1, D4

Suggested Citation

Dube, Jean-Pierre H. and Hitsch, Guenter J. and Rossi, Peter E. and Vitorino, Maria Ana, Category Pricing with State Dependent Utility (December 2006). Available at SSRN: https://ssrn.com/abstract=875125 or http://dx.doi.org/10.2139/ssrn.875125

Jean-Pierre H. Dube

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://gsb.uchicago.edu/fac/jean-pierre.dube

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Guenter J. Hitsch

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Peter E. Rossi (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
773-294-8616 (Phone)

Maria Ana Vitorino

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

HOME PAGE: http://www.maria-ana-vitorino.com/home.html

University of Minnesota - Carlson School of Management ( email )

3-150 Carlson School of Management
321 - 19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://www.maria-ana-vitorino.com/home.html

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